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IASB Meeting — 24–25 January 2018

Start date:
24 Jan 2018

End date:
25 Jan 2018

Location: London

Overview

The IASB met in public on Wednesday 24 and Thursday 25 January 2018.

Wednesday 24 January

Primary Financial Statements

The Board discussed the presentation of management performance measures and the presentation of the results of associates and joint ventures. The Board decided that (a) all entities be required to specify their key performance measure(s) in the financial statements; identify such measures as MPMs if they are not IFRS-defined measures; and the key performance measures identified in the financial statements must include, as a minimum, those that are communicated in the annual report; (b) the reconciliation between the MPM and IFRS-defined measure be presented in the notes; (c) no specific constraints should be imposed on the MPMs; (d) did not agree to require a five year summary of the MPM; (e) will allow MPM information in the segment note; (f) and not to specify that MPMs are not an IFRS-defined measure (as they relate to regulatory requirements). In relation to associates and joint ventures, the Board decided to propose that entities be required to present the results of ‘integral’ associates and joint ventures separately from ‘non-integral’ associates and joint ventures.

Financial Instruments with Characteristics of Equity

The Board considered the appropriate accounting for non-derivative instruments with equity hosts with complex payoffs. This type of instruments has not been discussed by the Board before and was identified during the review of a pre-ballot draft of the Financial Instruments with Characteristics of Equity Discussion Paper. The instruments under consideration give rise to claims against the entity that are limited to the entity’s available economic resource, but the claims are also affected by other variables such as a commodity index. The Board decided to seek feedback in the DP on whether the embedded derivative should be separated and whether and how the attribution requirements may help provide information about the alternative settlement features.

Thursday 25 January

Conceptual Framework

The Board was updated on the project. The final document is expected to be published in March 2018.

Goodwill

The Board decided to remove the requirements in IAS 36 to (a) use pre-tax inputs when calculating value in use and (b) consider whether to remove the requirement to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating value in use.

IFRS Implementation Issues

The Board considered two issues referred to it by the IFRS Interpretations Committee. The first is a possible research project on commodity loans and related transactions, including cryptocurrencies. The Board had mixed views about whether they should take on this project. Several Board members questioned whether there is diversity in practice to such an extent that users have made ill-informed decisions that would justify the Board spending resources on it. But others thought the Board should not be dismissive. One approach would be to assess whether the scope of some existing Standards could be amended to cater for commodities and digital currencies as opposed to creating new Standards for them. This might expedite the Standard-setting process and cover a wider range of transactions. The Board also decided to propose an annual improvement to remove the requirement in IAS 41 to use pre-tax cash flows when fair valuing a biological asset.

Post-implementation review of IFRS 13 Fair Value Measurement

The Board started considering the feedback from its review of IFRS 13. They discussed a review of academic literature, feedback from the request for information and a summary of other research conducted by the staff. Overall, given that there is general consensus that IFRS 13 is working well, the Chair asked that the Staff propose only changes that are absolutely necessary and not to waste time on nice-to-have improvements.

Agenda for the meeting

Wednesday 24 January 2018

Primary financial statements

Requirements for management performance measures (MPMs)

Presentation of the share of the profit or loss of ‘integral’ associates and joint ventures

Financial instruments with characteristics of equity

Thursday 25 January 2018

Conceptual Framework

IFRS implementation issues

Commodity loans and related transactions: Potential new research project

Related Topics

Related Discussions

The IASB continued its discussion on the primary financial statements project. The topics for this meeting were (1) requirements for management performance measures (MPMs) and (2) presentation of the share of profit or loss of ‘integral’ associates and joint ventures.

Cover note – Agenda paper 21

Background

The IASB continued its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting were as follows:

Requirements for management performance measures (MPMs) (AP 21A)

Presentation of the share of profit or loss of ‘integral’ associates and joint ventures (AP 21B)

The Staff plan to discuss the following topics at future Board meetings: (a) further development of the proposed structure of the statement of financial performance to cater for more complex scenarios; (b) presentation of management-defined adjusted earnings per share; (c) classification of dividends received from associates and joint ventures in the statement of cash flows; (d) principles of aggregation and disaggregation, including considering thresholds and the need for additional minimum line items; and (e) developing illustrative examples/templates for the PFS for a few industries.

Background

This was a continuation of the December 2017 discussion. In this paper, the Staff discussed further issues around the disclosure of MPMs in the financial statements.

Staff analysis and recommendation

The Staff analysed the following areas:

1. Circumstances when an MPM should be required

Previously, the Board considered whether all MPMs communicated by management (e.g. through investor presentations, results announcements etc.) should be disclosed in the financial statements, or whether this should be limited to only those MPMs that are contained in an entity’s annual report.

The Staff believed that the scope should be limited to MPMs that are included in the annual report because this is a confined set of information that is publicly available and can be audited. This would adequately achieve the objective of enhancing investor confidence in a sufficiently wide range of MPMs used by management. Extending the scope to a wider population would be practically challenging from an access and enforcement perspective.

Nevertheless, the Staff acknowledged that management could still circumvent the requirement to disclose MPMs in the financial statements by disclosing them outside the annual report. However, in that case, management would presumably be under more pressure from users and regulators to explain why they are reporting different performance measures from the ones in the annual report/financial statements, thus helping to rein in abuse.

In light of the above, the Staff recommended that the Board require:

all entities to specify their key performance measure(s) in the financial statements;

an entity to identify such measures as MPMs if they are not IFRS-defined measures; and

the key performance measures identified in the financial statements to include, as a minimum, those that are communicated in the annual report.

2. Location of the reconciliation between the MPM and an IFRS-defined measure

In its December 2017 meeting, the Board tentatively decided that if an MPM does not meet the requirements to be presented as a subtotal in the statement of financial performance, the MPM should be provided in a separate reconciliation. However, the Board did not decide on the location of that reconciliation.

In this paper, the Staff further analysed the pros and cons of presenting the reconciliation either (a) as part of the primary financial statements immediately after the statement of financial performance, or (b) in the notes. On balance, the Staff believed that it is more advantageous to include the reconciliation in the notes because this would not affect the structure of the statement of financial performance or clutter it and would alleviate some Board members’ concern of inappropriately elevating the status of an MPM to an IFRS measure.

Accordingly, the Staff recommended that the Board require the reconciliation to be disclosed in the notes. Furthermore, they recommended that the Board require an entity to choose the most appropriate IFRS-defined measure to which the MPM should be reconciled, instead of mandating the starting point for the reconciliation.

3. Constraints on the MPM in a separate reconciliation

The Board had discussed this before. Views were mixed at previous meetings with some members observing that imposing constraints on an MPM would undermine the ability of management to tell its own story, while others observed that not imposing any constraints would allow management to present misleading information.

The Staff were of the view that an MPM should reflect management’s view as much as possible. They also noted that if the MPMs are presented on the face of the statement of financial performance, they would be subject to the stringent requirements of IAS 1.85A. Even if the MPM is presented in the notes, the general requirements of IAS 1 would require that such measures fairly present the financial performance of an entity and that they be consistently presented over time. These requirements would help reduce the risk of entities promoting misleading information through the use of MPMs.

Accordingly, the Staff recommended that the Board not impose any specific constraints on MPMs, but to require disclosures that would ensure transparency and discipline of such measures.

4. Additional disclosure requirements

This was another aspect that the Board had discussed before. The Staff continued to believe that the following disclosures should be required for each MPM, and recommended the same to the Board:

a description of why the MPM provides management’s view of performance, including an explanation of how the MPM has been calculated and why;

a five year historical summary showing the calculation of the MPM for each year; and

if there is a change in how the MPM is calculated during the year, sufficient explanation to help users understand the reasons for, and the financial effect of, the change.

5. Interaction with IFRS 8 segment profit or loss

Management use MPMs to assess the performance of an entity. Similarly, IFRS 8 requires an entity to report the profit or loss for each reportable segment, which management uses to assess the performance of the segment. As such, some Board members were of the view that these two measures are linked and that the MPM reconciliation could be included as part of the operating segments note.

The Staff disagreed. They believed that a typical MPM would not necessarily be the same as any or all of the reportable segments’ profit or loss. For example, the MPM might include amounts that are not allocated to segments such as share of profit of associates, headquarter expenses etc. Disclosing the MPM as part of the segment note would also obscure both sets of information.

Accordingly, the Staff recommended the following:

the reconciliation between the MPM and the IFRS-measure should not be combined into the operating segment information; and

an entity should explain how the MPM differs from the total profit or loss for the reportable segments.

As noted above, some Board members were concerned that including MPMs in the financial statements would elevate their status to an IFRS-measure. This has the potential of excluding the MPMs from the requirements of non-GAAP measures imposed by regulators.

The Staff acknowledged these concerns and recommended that the Board specify that MPMs are not an IFRS-defined measure and that existing regulatory requirements for non-GAAP measures would continue to apply to MPMs.

Discussions

1. Circumstances when an MPM should be required

The Board approved the Staff recommendations.

There was significant debate on this issue. Many Board members asked the Staff to clarify what is meant by an ‘IFRS-defined’ measure: does this include only subtotals specified in a Standard, or does it also include numbers derived from IFRS figures e.g. a subtotal that excludes restructuring costs or share-based payment expenses as calculated in terms of the relevant Standards?

The same question arose on ‘key performance measures’ – how is this term defined? This is critical because only MPMs that are identified as a key performance measure would need to be presented in the financial statements in terms of the Staff’s proposals.

The Staff agreed to provide more guidance on these two issues. Preliminarily, the Staff would not view operating profit as an IFRS-defined measure. They also reiterated that the MPMs under discussion are restricted to financial measures only and exclude ratios and growth rates (e.g. revenue growth rates or order books).

2. Location of the reconciliation between the MPM and an IFRS-defined measure

Eleven Board members agreed to include the reconciliation in the notes.

One of the Board members who disagreed observed that many investors would like to know the MPMs at the earliest opportunity which is usually on the results announcement date. However, notes to the financial statements usually do not form part of the results announcement package. To that point, another Board member observed that regulators often require only particular line items on the statement of financial performance (as opposed to the full statement) to be included in the results announcement. Consequently, including the reconciliation on the face of the statement of financial performance may not make the MPMs available earlier.

3. Constraints on the MPM in a separate reconciliation

Thirteen Board members agreed that no specific constraints should be imposed on the MPMs.

One Board member observed that there is actually information value in an unconstrained number because one can see how far management stretches the figures. From that, analysts can impute many things. Some members also believe that there are sufficient built-in constraints to rein in abuse, e.g. the existing requirements of IAS 1 about fair presentation. Furthermore, an entity may deliberately make an MPM fail the constraints so that it does not have to be included in the financial statements. This would go against the objective of the project.

4. Additional disclosure requirements

The Board agreed with the Staff recommendations except for the requirement to show a five year summary of the MPM. Some members believe that this would not be practicable when there are changes in Standards because different measurement and recognition bases (e.g. IFRS 16 versus IAS 17) would render the comparative figures meaningless. They believe that the normal requirement of two years is sufficient.

5. Interaction with IFRS 8 segment profit or loss

The Board modified the Staff’s suggestion to one where entities are not prohibited from including MPM information in the segment note if they wish to do so. However, if for structural of formatting reasons (e.g. there are multiple MPMs and/or the reconciliations are complicated) the MPM information does not fit within the segment note, then management should explain how it reconciles to segment information.

This is linked to the points raised in issue 1. The Board generally thought that the proposed statement ‘a MPM is not an IFRS-defined measure’ was internally inconsistent given that the Board is proposing to mandate the inclusion of qualifying MPMs into the financial statements. The Vice-Chair observed that regulators may have to reassess the applicability of their requirements regarding non-GAAP measures to MPMs once the Board finishes this project.

Presentation of the share of the profit or loss of ‘integral’ associates and joint ventures – Agenda paper 21B

Background

This paper discusses whether an entity should distinguish between integral and non-integral associates and joint ventures for the purpose of presenting an entity’s share of profit or loss from these investments, as well as in which section of the statement of financial performance these shares of results should be presented.

Staff analysis

As previously discussed, some users incorporate the results of integral associates and/or joint ventures when assessing the performance of an entity. Notwithstanding this, many users exclude the results of investments from associates and joint ventures in their entirety when valuing a business because they regard the activities of these investees as peripheral and their results as being of a different quality from consolidated profit or loss. Be that as it may, the Staff believed that separately presenting the results of integral associates and joint ventures from those that are not integral would be useful because this would bring consistency to how preparers provide such information.

In order to apply this requirement consistently, the Staff suggested that the Board define an integral associate or joint venture as one ‘whose activities are integrated into an entity’s business activities and are thereby essential and fundamental in carrying out these activities’. This definition is based on the ordinary meaning of ‘integral’.

As to the location for presenting the results from integral associates and joint ventures (results from non-integral investees would be presented within the income/expense from investments category), the Staff proposed three alternatives:

above the ‘income/expenses from investments’ category, as part of an entity’s business activities;

above the ‘income/expenses from investments’ category, but placed immediately after the entity’s business activities by creating an additional subtotal; or

within the ‘income/expenses from investments’ category but separately from the results from ‘non-integral’ associates and joint ventures.

The Staff analysed the pros and cons of each approach and preferred approach B. This was because it maintains a segregation between the returns on controlled assets and liabilities and the returns on non-controlled investments, while indicating the more integrated nature of particular associates and joint ventures. Given the varied views that stakeholders have on this issue, the Staff recommended that all three approaches be included in the next consultative document for comment.

Staff recommendation

The Staff recommended that the Board:

require entities to present the results of ‘integral’ associates and joint ventures separately from ‘non-integral’ associates and joint ventures;

with regard to the definition of ‘integral’:

define an ‘integral associate or joint venture’ as described above;

include a non-exhaustive list of indicators of an integral associate or joint venture; and

prohibit entities from changing the way an associate or joint venture is classified, unless the relationship between the entity and the investee changes substantively (the Staff did not elaborate on what would constitute a substantive change); and

discuss all three approaches to presenting the share of profit or loss of integral associates and joint ventures, indicating approach B as the preferred approach.

Discussion

Twelve Board members agreed with separately presenting the results of integral associates and joint ventures from those that are non-integral. The Board rejected the Staff’s proposed definition of integral and suggested using the proposed definition of ‘income/expenses from investments’ to draw the distinction. The Board also preferred approach B with regard to presenting the share of profit or loss of integral associates and joint ventures and rejected the other two approaches.

The Board generally agreed that a distinction between integral and non-integral associates and joint ventures would provide useful information; however, they had mixed views regarding how that distinction should be made. Some Board members thought that the terms ‘essential and fundamental’ to an entity’s activities is a high hurdle for an integral associate or joint venture. This proposal would also introduce new terms into the Standards that are undefined which will cause further interpretation issues.

The Vice-Chair questioned why associates are different from other types of investments, i.e. why not split other investments between integral and non-integral? Some people may even argue that this could be extended to non-investor-investee relationships, e.g. sales to or purchases from integral customers and suppliers should be separately disclosed, especially if one of the indicators of an integral associate is its being a critical supplier or customer. Furthermore, IFRS 12 currently requires an entity to provide information about material associates. Separately disclosing integral associates would seem to duplicate efforts.

In light of the above, many Board members preferred using the proposed definition of ‘income/expenses from investments’ to distinguish between integral and non-integral associates and joint ventures. Under this approach, the results of associates and joint ventures that do not generate a return for the entity individually and largely independently from other resources held by the entity would be excluded from the investing category. More detailed application guidance have yet to be developed. This approach reduces the introduction of new concepts into the Standards and treats equity-accounted investments in the same way as other investments.

As for the location of presenting the results of integral associates and joint ventures, the Board rejected approach C because that would be inconsistent with the decision above. The Board also rejected approach A because it would exacerbate users’ concerns about mixing an entity’s share of post-tax results with other pre-tax consolidated results.

In this session, the Staff discussed potential ways to provide useful information about non-derivative instruments with equity hosts with complex payoffs. This type of instruments has not been discussed by the Board before and was identified during the review of a pre-ballot draft of the Financial Instruments with Characteristics of Equity Discussion Paper.

Background

In this paper, the Staff explored potential ways to provide useful information about non-derivative instruments with equity hosts with complex payoffs. This type of instruments had not been discussed by the Board before and was identified during the review of a pre-ballot draft of the Financial Instruments with Characteristics of Equity Discussion Paper (FICE DP).

The instruments under consideration give rise to claims against the entity that are limited to the entity’s available economic resource, but the claims are also affected by other variables such as a commodity index.

An example of such an instrument is a callable share with a strike price linked to a gold index. All terms of the share are identical to a ‘vanilla’ ordinary share save for the call option. For such a share, the issuer’s obligation is limited to the lower of:

the fair value of the ordinary shares if the option is not exercised (i.e. the claim is limited to the entity’s available economic resources); and

the strike price linked to a gold index if the option is exercised (i.e. the claim is affected by a variable that is independent of the entity’s economic resources).

Under the Gamma approach, a claim will be classified as a liability if it:

requires the transfer of economic resources at a specified time other than at liquidation; or

specifies an amount that is independent of the entity’s available economic resources.

Applying these concepts to the gold-indexed callable share above, the share would be classified as equity in its entirety. This is because the issuer has no contractual obligation to transfer economic resources other than at liquidation and the amount of the claim is limited to, and hence depends on, the entity’s available economic resources. However, once classified as equity, information about the derivative component (i.e. the variability arising from the gold index) will not be disclosed.

In order to address this lack of information, the Staff explored three potential ways to provide useful information.

Staff analysis

1) Accounting for the embedded derivative separately

Under this alternative, the callable share above will be separated into an equity host and an embedded call option derivative, each of which will be separately accounted for. This will lead to a gross up of equity and assets on the statement of financial position (i.e. equity will comprise the cash received on the issue of shares plus the amount of the derivative asset).

The Staff observed that although this alternative captures the entity’s exposure to the embedded derivative through classification, recognition and measurement, there are challenges regarding the identification of the host instrument and separation of the components.

2) Excluding deeply out of the money options from the classification assessment

Under this alternative, deeply out of the money options would be ignored in the classification assessment. For example, a convertible bond with an issuer-held conversion option that is deeply out of the money may be classified as liability in its entirety. This concept may be extended further to all contractual terms that have little or no economic effect. In such a case, the question is whether such contractual terms are substantive and thus relevant for the classification assessment.

Although this might better reflect the economic substance of the financial instrument, the Board’s preliminary view under the Gamma approach is that economic compulsion should not be considered when classifying a claim as liability or equity because this would be inconsistent with the requirement to account for financial instruments based on their contractual terms. The Staff noted further that this alternative will have a far-reaching impact and will affect instruments beyond those under review. Accordingly, they did not recommend that the Board pursue this alternative.

3) Expanding the attribution requirements

Under the Gamma approach, entities are required to provide information for equity-classified derivatives through attributing particular income and expenses to specific classes of equity.

If the Board does not pursue alternatives 1 or 2 above and the entire instrument is classified as equity, the Staff believed that the attribution requirements could be expanded to cover such instruments in order to provide useful information.

Staff recommendation

In light of the above, the Staff recommended that the Board seek feedback from respondents on the following questions before proposing any particular accounting requirements:

a question regarding separation of the embedded derivative; and

whether and how the attribution requirements may help provide information about the alternative settlement features.

Discussion

The Board approved the Staff recommendation.

The Vice-Chair disagreed with the Staff’s analysis of the mandatorily convertible bond example. This features a bond that is mandatorily convertible into a variable number of shares with a cap on the number of shares issuable. The Staff classified the entire instrument as equity. The Vice-Chair believed that it should be classified as a compound instrument with a debt host and an embedded derivative. She reasoned as follows.

Under the Gamma approach, a claim will be classified as a liability if the amount payable is independent of the entity’s available economic resources. A claim will be classified as equity if, inter alia, the amount payable is dependent on the entity’s available economic resources such that the amount never exceeds the available economic resources of the entity. Because the bond is convertible into a variable number of shares, the amount of the claim is independent of the entity’s available economic resources and thus the instrument has a debt host. The dependency should be assessed first before looking at the cap, otherwise this will be subject to structuring opportunities where issuers can include a cap on every instrument to achieve equity classification.

Several Board members were confused about the interaction of the concept of independence (liability classification) and the concept of a claim never exceeding the available resources of the entity (equity classification). They were not sure whether one trumps the other. The Vice-Chair acknowledged these concerns and said it is critical to articulate the interaction of the two concepts clearly in the DP. The Staff will also include the mandatorily convertible bond example above in the DP to assist with the explanation.

The Staff gave the Board an update on the Conceptual Framework project.

Project update - Agenda paper 10

The Staff gave the Board an update on the Conceptual Framework project.

Next steps

The Staff have issued a ballot draft of the revised Conceptual Framework to Board members in December 2017. The final document is expected to be published in March 2018.

As for the References to the Conceptual Framework document, the Staff expect to ballot it in February 2018 so that it can be issued together with, or shortly after, the revised Conceptual Framework. These amendments are expected to be effective from 1 January 2020.

Background

In March 2017, the IFRS Interpretations Committee (IC) considered a submission about how to account for a particular commodity loan transaction. The IC decided not to add the issue onto its agenda and to refer the matter to the Board on grounds that it is too big for the IC to address.

In this paper, the Staff gave an overview of typical commodity transactions and provided the Board with an update on the recent developments on digital currencies and emission allowances. The aim was to inform the Board of the extent of diversity in practice so that it can decide at a future meeting whether commodity loans and related transactions should be added onto the research agenda.

This session was for information only and the Board was not asked to make any decisions.

Staff analysis

There are no existing Standards that deal directly with transactions involving commodities, digital currencies and emission allowances. In the absence of specific guidance, different Standards may be applicable to different transactions according to the nature of the transaction. Nevertheless, for more complex transactions, they may not fall neatly within the scope of any existing Standard. This has led to diversity in practice.

The recent development in the digital currency arena has also sparked calls for the Board and the FASB to address how digital currencies should be accounted for. In 2017 alone, the Japanese government passed a law making digital currency a legal payment method; there was an increasing number of initial coin offerings where entities sell newly created digital currencies; and two of the world’s largest derivative trading exchanges began offering bitcoin futures. Entities currently account for digital currencies as one of the following: cash, another financial asset, inventory or intangible asset.

Given the broad range of transactions, the Staff observed that it will be critical to define clearly the scope of any potential project.

Discussion

The Board had mixed views about whether they should take on this project as well as the scale of the project. The Chair questioned the sustainability of digital currencies and several other Board members questioned whether there is diversity in practice to such an extent that have caused users to make ill-informed decisions to justify the Board spending resources on it. However, the Vice-Chair observed that digital currencies is a hot topic and that the Board should not be dismissive about its potential consequences. The Chair asked the Staff to liaise with regulators to see whether they see any urgent need for Standard-setting activities in this regard, as well as to consider which projects in the research pipeline should be postponed to make way potentially for this project.

The Board considered whether the scope of some existing Standards could be amended to cater for commodities and digital currencies as opposed to creating new Standards for them. They believe this could help expedite the Standard-setting process and cover a wider range of transactions (e.g. artworks). The focus would be on the nature and characteristics of the transactions, i.e. are they held for speculative purposes, as long-term investments or used in a way similar to cash because of their liquidity etc., rather than on the items underlying the transactions (i.e. whether they are commodities or digital currencies).

Background

In September 2017 (agenda paper 3), the IC considered a request to remove the requirement in IAS 41 to use pre-tax cash flows when fair valuing a biological asset. The IC recommended that the Board propose such an amendment as part of the next annual improvements cycle.

Staff recommendation

The Staff recommended that the Board accept the IC’s recommendation and to require prospective application of the proposed amendment to avoid the potential use of hindsight, with earlier application permitted.

Discussion

The Board approved the Staff recommendation without much discussion.

A Board member suggested coordinating the issue of the proposed amendments with the potential next steps arising from the IFRS 13 post-implementation review.

The Board continued its discussions on the goodwill and impairment research project. The Staff discussed the following topics in this meeting (1) removing the requirement to use pre-tax inputs when calculating value in use (VIU) and (2) removing the requirement to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating VIU.

Cover paper - Agenda paper 18

The Board continued its discussions on the goodwill and impairment research project. The Staff discussed the following topics in this meeting:

Removing the requirement to use pre-tax inputs when calculating value in use (VIU): AP 18A

The Staff plan to discuss the following at the next meeting: (a) ways to simplify the identification and separation of intangible assets acquired in a business combination from goodwill; and (b) whether the next consultative document should be a discussion paper or an exposure draft.

Value in use: what tax attribute should be reflected in value in use? Agenda Paper 18B

Background

In this paper, the Staff analysed whether the Board should consider removing the requirement to use pre-tax inputs in calculating VIU.

Staff analysis

Stakeholders have consistently pointed out that calculating VIU on a pre-tax basis and disclosing the pre-tax discount rate is not useful. This is because the current value of an asset is regarded and understood as a post-tax measure and the related valuations are done on a post-tax basis in order to reflect the net return to an investor. Disclosing a pre-tax discount rate is merely a mechanical exercise of reverse-engineering an existing post-tax result. As such, it is a meaningless figure to many stakeholders.

The Board’s predecessor, the IASC, required the use of pre-tax inputs because it was concerned that using post-tax inputs without specifying the basis for computing the future tax cash flows (i.e. the tax attribute) would cause double counting. This is because IAS 12 already requires an entity to recognise a deferred tax asset or liability on the future tax consequences of an entity’s assets and liabilities. If the VIU is also calculated on a post-tax basis, the tax effect would be reflected twice in an entity’s financial statements. Although the problem could potentially be resolved by stipulating what tax attribute the VIU should reflect, the IASC believed that the ensuing calculations would be complex and burdensome.

In the paper, the Staff used a numerical example to illustrate how such a calculation could be done. Nevertheless, they acknowledged that any serious consideration of this approach would require an extensive analysis of the interaction between IAS 36 and IAS 12 and hence would not meet the simplification objective of the research project.

Staff recommendation

In light of the above, the Staff recommended that the Board remove the requirement in IAS 36 to use pre-tax inputs when calculating VIU, but to require an entity to:

This would make the VIU calculation consistent with that of fair value and the Staff’s proposal to remove the requirement in IAS 41 to use pre-tax discount rates when determining the fair value of a biological asset (see AP 12B to this month’s Board meeting).

Discussion

The Board agreed with the Staff recommendation without much discussion. The Chair observed that the benefits of removing ‘fake accuracy’ resulting from reverse engineering a pre-tax discount rate outweighs the conceptual concerns of double counting.

Background

In this paper, the Staff analysed whether the Board should consider removing the requirement to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating VIU.

Staff analysis

IAS 36 requires VIU to be calculated based on the estimated future cash flows arising from the asset’s current condition. As such, cash flows relating to uncommitted future restructurings and enhancing an asset’s performance are required to be excluded from the VIU calculation. This concept was reaffirmed by the Board in 2004 when it revised IAS 36.

The Staff, however, thought that inherent in the current condition of a typical asset within the scope of IAS 36 is the potential to restructure or enhance the asset. A market participant would be willing to pay for (or would ask to be paid for) this potential when buying (or selling) the asset. The Staff believed that such a currently existing potential should be factored into the VIU calculation to be consistent with determining the fair value of an asset.

Furthermore, the Staff believed that removing this requirement would have the following benefits. It would:

dispel the perception that the cash flow composition of VIU is linked to the recognition requirements of IAS 37. Some people think that the prohibition to include cash flows from an uncommitted restructuring in the VIU calculation is due to IAS 37’s prohibition of recognising a provision for such a restructuring. The Staff did not think this is a valid view because many cash flows included in a VIU calculation are not recognised as liabilities.

avoid creating a rule to exclude particular cash flows because they may be prone to overly optimistic assumptions. Some people argue that cash flows from uncommitted restructurings and asset enhancements are subject to significant uncertainties and are thus more prone to management manipulation. The Staff acknowledged these concerns but believe them to be an issue of compliance rather than accounting.

Staff recommendation

In light of the above, the Staff recommended that the Board remove the requirement in IAS 36 to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating VIU.

Discussion

The Board agreed to explore removing the requirement to exclude cash flows relating to uncommitted future restructurings and asset enhancements when calculating VIU in the next consultative document together with the pros and cons of the removal. Depending on whether an exposure draft or a discussion paper will be issued, the Board may have to redeliberate this matter with further analysis.

Although the Board was generally supportive of removing the exclusion, many Board members were concerned that this will open the door to management opportunism. Some members suggested putting parameters around what types of uncommitted restructurings can be included in the cash flows, e.g. based on probability or including only those that appear in a budget approved by the CODM or high-level management.

There was no firm conclusion on this though and several Board members said putting in constraints would actually make the VIU calculation more complex. They also noted that there are sufficient existing safeguards in IAS 36 about the reasonableness of cash flows to curb malpractice. If these are not working in practice then it is an issue of enforcement and not of standard-setting.

The objective of this session was for the Board to consider the request for information feedback as well as the results of the academic literature review.

Feedback summary: cover paper – Agenda Paper 7

This was an education session and contained no questions for the Board.

As part of phase 2 of the post-implementation review (PIR) of IFRS 13, the Board published a request for information (RFI) in May 2017 and also tasked a group of academics to conduct an academic literature review on IFRS 13.

The objective of this session was for the Board to consider the RFI feedback as well as the results of the academic literature review. The papers for this meeting were as follows:

Academic literature review:

cover note (AP 7A)

summary of the literature review (AP 7B)

full paper of the literature review (AP 7C)

Background on the IFRS 13 PIR (AP 7D)

Review of the feedback received on the RFI:

summary of feedback received (AP 7E)

detailed review of feedback by RFI topics (AP 7F)

Summary of other research conducted by the Staff (AP 7G)

Next steps

The staff will ask the Board to decide on how to respond to the feedback at a future meeting. The Staff do not intend to perform any additional analysis or outreach unless specifically requested by the Board.

Background

The literature review focused on fair value literature that was relevant to the questions raised in the RFI, where available. Half of the review team members were academics from business schools in Canada and most of the literature reviewed drew on data from the United States.

provide investors with added assurance that reduces their perception of risk in fair value estimates, thereby increasing their confidence in the reported numbers as they can better judge and process the management estimates.

The research also discussed value relevance. This refers to the relationship between an accounting estimate and a company’s market share price, future earnings as forecasted by financial analysts or actual future earnings and cash flows. The concept of value relevance is important as it indicates whether financial reporting captures information that is relevant to investors.

Overall, the studies showed that assets measured at fair value are value relevant. This is irrespective of the level of the fair value hierarchy in which they are categorised, albeit generally in descending order, with Level 1 being the most value relevant. The value relevance of Level 3 measurements appears to be contextual, for example, markets with more sophisticated institutional investors assign greater value relevance to Level 3 than other markets.

Research also showed that managers take advantage of their discretion in determining fair value measurements either positively to enhance the usefulness of the fair value information, or negatively to manipulate numbers to achieve desired results.

Fair Value Measurement of Non-financial Assets: Highest and Best Use and Other Judgements (RFI questions 4 and 5)

There was scant research on the application of the concept of highest and best use. However, the paper referred to an interesting study in which managers of various large European firms admitted that they manage the difficulty in applying the fair value measurement requirements for non-financial assets as follows:

finding a suitable result by strategically adapting IFRS 13 requirements;

narrowing the problem to make it manageable (e.g. supply auditors with limited information in order to reduce any disagreements on this topic); and

outsourcing the problem to external valuers.

Auditors also found the auditing of fair value measurements challenging because of the complexity of the underlying models, inputs and assumptions. This in turn led auditors to place more reliance on external specialists and to require clients to make additional disclosures.

Biological Assets (RFI question 6A)

A study showed that the use of fair value measurement raises a firm’s cost of debt, especially if the underlying assets are bearer plants. Another work-in-progress study showed that fair value measurement for biological assets is more useful when the asset will be realised through sale (agricultural produce) rather than through use (bearer plants). This may indicate that the use of fair value for bearer plants raises some challenges for investors and creditors.

Only three studies addressed the correlation between the extent of fair value measurements and audit fees. The results from these studies were inconclusive.

Regarding information processing costs, one work-in-progress study found that the higher the reporting complexity (i.e. having lots of fair value measurements, derivatives and pension obligations), the lower the coverage by analysts. The study suggested that this may be due to the specialisation required to understand complex accounts.

Discussion

A couple of Board members commented on the US- and Euro-centric nature of the study and the insufficient coverage of non-English speaking countries, particularly emerging markets. They believed that it is important to understand the level 3 fair value measurement experience of emerging markets if the Board was to address the challenges adequately in that regard.

The discussion also indicated that there is value relevance in good fair value measurement disclosures, especially if preparers provide entity-specific information relating to level 3 fair value measurements. These disclosures are beneficial for the capital markets and there is a positive correlation between good disclosures and a company’s share price. One Board member said that this supports the Board providing education material on how to do a better job in providing the information required by IFRS 13 rather than dispensing with the disclosure requirements.

Background

In this paper, the Staff summarised the feedback received on the RFI on the IFRS 13 PIR, including feedback from the Board’s consultative bodies.

Summary of feedback received

Respondents generally believed that IFRS 13 works well and has achieved its objectives. Their main areas of concern were consistent with those identified in phase 1 of the PIR.

All types of respondents (i.e. preparers, accounting firms, users, regulators etc.) asked the Board to clarify the unit of account issue for quoted investments. This is also known as the ‘PxQ’ issue, which refers to the determination of fair value of a quoted investment in subsidiary, associate or joint venture – should the unit of account be each individual share or the investment as a whole? While users prefer the fair value of the investment to be based on the quoted price regardless of the unit of account, preparers prefer the measurement to be based on the unit of account.

Most respondents commented on the usefulness of the IFRS 13 disclosure requirements. Users continued to request for further improvements, e.g. by ensuring appropriate disaggregation and transparency, and to require additional disclosures for level 2 measurements. In contrast and as expected, most preparers thought that the existing requirements are excessive and some are not useful from a cost-benefit perspective. Regulators and accounting firms expressed similar views as the preparers and both asked for improving usefulness without reducing disclosure requirements.

The determination of highest and best use for a non-financial asset remains an area of concern for some preparers. Many preparers also requested further guidance in areas concerning the application of judgement, measurement of biological assets and unquoted equity instruments, albeit to a lesser extent. However, they had different views about what that guidance should entail and who should provide it. Users of financial statements expressed little concern in these areas.

Almost all respondents commented that maintaining convergence with US GAAP is important to them and that it is a main driver for achieving comparability across the globe.

Discussion

The Board spent a significant amount of time discussing the usefulness of IFRS 13 disclosures, especially on what could be done to help relieve preparers’ frustration and to align the interests of preparers and users.

The discussion centred on the usefulness of the quantitative sensitivity analysis for significant unobservable inputs in Level 3 measurements. This disclosure is not required under US GAAP and one Board member questioned whether and how such a disclosure provides useful information if stakeholders in the US are not seeking the same information on a converged Standard. Another problem is that the usefulness of the sensitivity analysis is often masked by over aggregation. Some Board members suggested providing education and real life examples to preparers on what good disclosures look like; however, others doubted the benefits of such activities because of the challenge of providing just the right level of disaggregation without cluttering the financial statements. This is where the disclosure initiative projects become relevant and several Board members suggested that they should do more to promote the use of the Materiality Practice Statement and that they could illustrate how it could be applied in the context of IFRS 13 disclosures.

There was also some discussion on providing more disclosures for level 2 measurements similar to those for level 3 measurements. This is because it is often a fine line distinguishing between these two levels and yet the disclosure requirements for them differ significantly.

Overall, given that there is general consensus that IFRS 13 is working well, the Chair asked that the Staff propose only changes that are absolutely necessary and not to waste time on nice-to-have improvements.

Research conducted during Phase 2 of the PIR – Agenda Paper 7G

Background

This paper summarised other desk-based research conducted by the Staff as part of phase 2 of the IFRS 13 PIR.

The Staff searched through company financial reports and other publications to assess the following:

whether there are any voluntary disclosures of quantitative sensitivity analysis for Level 3 fair value measurements;

whether there are any instances where the highest and best use differs from current use; and

the nature of disclosures on valuation adjustments.

Research purpose and findings

Voluntary disclosures of sensitivity analysis

Preparers have often questioned the usefulness of the quantitative sensitivity analysis for Level 3 measurements because it is the most costly disclosure to prepare. This disclosure is not required under US GAAP. It is also not required for non-financial instruments under IFRS. The Staff therefore conducted research to see whether there are any voluntary disclosures in this regard because this may indicate that the information is perceived as being useful.

The Staff found a few companies (not an exhaustive search) that voluntarily disclosed a sensitivity analysis for investment properties. However, they did not find any American listed companies reporting under US GAAP in the past 12 months that voluntarily provided this disclosure.

Highest and best use differing from current use

Some stakeholders were concerned that the highest and best use concept may not be appropriate for operating assets, because some such assets could be assigned a nil value under the residual method when it is valued as part of a group of assets. The Staff therefore conducted research to assess how frequent it is that companies report a highest and best use that differs from the current use.

Out of a sample of 60 companies, the Staff found one such instance.

Disclosures about valuation adjustments

Several stakeholders have informed the Staff that some entities include credit valuation adjustments (CVA) and debit valuation adjustments (DVA) in the fair value measurements of financial instruments. However, the quality of the measurement of these adjustments varies depending on the entity’s sophistication and the availability of valuation skills and resources.

The Staff conducted research with the aim of understanding the nature of information, both quantitative and qualitative, that is disclosed about CVA and DVA adjustments.

The Staff reviewed over 15 companies’ financial statements with such adjustments. About half of these companies provided narrative disclosures and some form of numerical value for the adjustments. Some of these companies also indicated that CVA/DVA is a significant unobservable input.